It seems pretty certain now that having flirted with just about every tax rise under the sun, Rachel Reeves is going to increase income tax in her Budget on 26 November. That much became clear when Keir Starmer declined to take Kemi Badenoch’s invitation to rule out a rise in income tax rates at Prime Minister’s Questions yesterday. Previously when asked the question, he had always suggested that the government would stick to its promise not to raise the main rates of income tax, National Insurance or VAT.
Reeves will no doubt blame Brexit (as she already has done), the Tories (ditto) and Donald Trump for her fiscal black hole which is now forcing her to break the manifesto promise. She will try to make out that she is the honest one who has been undone by all the dishonest people around her, such as the Vote Leave campaign etc, and so, sorrow of sorrows, she will have to break that well-intended promise. She may even sob at the dispatch box. But sorry, it won’t wash.
Is Reeves plotting to only cut employees’ NICs, but not those of the self-employed?
The moment Reeves touches the tax rates she promised not to, she and her party are toast. The public will not forgive such a fundamental promise being broken – with the exception of the true socialists who want all taxes steadily raised and the state to appropriate all private wealth. Putting up the basic rate of income tax will please no one: neither people who want less public spending nor those who want more public spending. The latter group seem to have been conditioned to believe that all the revenue required to grow the state to their preferred size can be collected through a wealth tax. Reeves, at least, seems to have disavowed herself of this belief, but there will be huge anger among Labour supporters when she announces a rise in the basic rate of income tax without a wealth tax.
There is another possibility that is being floated: that Reeves will increase the basic rate of income tax by 2p in the pound but balance that with a cut of 2 per cent in employees’ National Insurance Contributions (NICs). Net result: working people pay just the same as they did before, while savers and investors (who don’t pay NICs, at least not currently) would pay more. By such devious means Reeves could well try to claim that she is not subjecting ‘working people’ to extra taxes – even though she would have blatantly broken her manifesto promise.
There is a big question, though: what happens to the self-employed? It is remarkable that even some national newspaper reporters seem ignorant of this group. The Telegraph, for example, carries a story today asserting that the above proposal ‘would amount to a tax hike on people who pay income tax and not National Insurance, such as pensioners, landlords and the self-employed’. I can vouch – and I declare an interest here – that the self-employed very much do pay NICs, albeit at 6 per cent rather than the 8 per cent paid by employees. They also qualify for less-generous benefits, such as sickness benefits, so they are not getting anything on the cheap. Moreover, self-employed people who earn more than £90,000 a year have to collect and hand over VAT on their labour – something which employees do not have to do.
Is Reeves plotting to only cut employees’ NICs, but not those of the self-employed? She could try to pass this off as equalising the tax arrangements between employees and the self-employed. But Phillip Hammond tried such a trick and was swiftly beaten back by protests from self-employed Tory voters, who pointed out the above. Somehow I don’t think that Reeves is going to order public sector bosses to hand over a chunk of their salaries to the VAT man.
Reeves might think she can get away with it, because Labour’s vote bank exists more among the public sector than with the self-employed. But not even Reeves could claim that self-employed plumbers, hairdressers and the like are not among her fabled ‘working people’. To jack up taxes for the self-employed would be a blatant breach of Labour’s tax promises.
All this assumes, of course, that it will be Reeves who delivers the Budget on 26 November. The Chancellor’s little local difficulty over her failure to gain a licence before letting her South London home does raise the possibility that she may go the way of Rayner and someone else be left to do the deed. The failure to understand the rules does rather show up government ministers once again for being out of touch and ignorant of the rules and taxes that they happily impose on others.
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